Youâ€™ve heard this line over and over again: To be smart with your money, you need to both build your savings and invest. The savings part is easy: Stash money away in a savings account â€” a little at a time â€” to pay for a particular goals, like an emergency fund or a new car. Investing is a different story, and learning how to buy securities that will grow in value over time isnâ€™t quite so simple.
Investments are made for the long-term, and investing involves taking on risk. That might make you nervous, but investing is essential for your financial health. Compound interest and market gains can help your money grow a much higher rate than a savings account, helping you build long-term wealth for your retirement.
The idea of investing might be intimidating, but donâ€™t worry, itâ€™s not as hard as you think. In fact, you can learn how to invest and get started in just five simple steps.
When youâ€™re young, time is on your side. Thatâ€™s especially true when it comes to investing. And the earlier you start the better, according to Dr. Brandon Renfro, a certified financial planner and an assistant professor of finance at East Texas Baptist University.
â€śEarnings from investments compound over time,â€ť Dr. Renfro said. â€śThe longer you give yourself to earn that compound return, the more money you will have when you reach a goal, such as retirement.â€ť
For example, letâ€™s say you invest $1,000 when youâ€™re 25 in an investment account that earns 5% interest, compounded annually. Even if you donâ€™t save another dime, your account will be worth $2,653.30 by the time youâ€™re 45. Without you doing anything at all, your money more than doubled. If you continue to contribute some money to your account each month, your money could grow even more, and the longer you let your money sit in an investment amount, the more it will increase in value.
The market fluctuates, moving up and down, dramatically sometimes. But over the long term, the market produces regular returns. According to the financial firm Morningstar, the long-term average return from the stock market is near 10%.
Investing while youâ€™re young allows you to ride out any short-term losses so you can take advantage of gains over the long-term. Even if the market dips over the near term, over the 20- to 30-year timeframe, youâ€™ll see reliable growth rates.
When deciding how much to invest, itâ€™s important to take your goals into consideration. If you have high-interest debt or if you donâ€™t have an emergency fund, it may make more sense to pay down your debt and build a small savings account before you invest.
After that, think about your long-term goals, such as planning for retirement. Youâ€™ve likely heard experts recommend that you save millions of dollars, but donâ€™t let that scare you. When youâ€™re just starting out, itâ€™s important to start saving whatever you can and to keep contributing consistently.
Vanguard, one of the biggest investment companies, recommends that you save 12% to 15% of your income for retirement. If that sounds impossible right now, save what you can afford, even if itâ€™s just $25 per month. Over time, those small amounts will snowball, helping you build a sizeable nest egg.
If your employer offers a 401(k) retirement plan and matches contributions, try to contribute enough to qualify for the full match. Thatâ€™s free money youâ€™d otherwise leave on the table.
When youâ€™re ready to start investing, itâ€™s important to think about what kind of account you want to open. There are three core investment account types:
According to Natalie Pine, a certified financial planner and managing partner of Briaud Financial Advisors, IRAs and employer-sponsored accounts are strong starting points.
â€śThere is no wrong way to save, but when you are young, a Roth IRA, 401(k), 403(b) is a great option,â€ť Pine said. â€śYou pay low taxes now and have tax-free growth for the rest of your life and the lives of your beneficiaries.â€ť
Once youâ€™ve chosen an account structure, you can think about what type of asset classes and investments you want to make. There are several different investment options:
Next, think about your investment strategy. Consider your own risk tolerance. Some people are comfortable taking on more risk, thinking itâ€™s worth it to potentially see high returns. Others get panicky when they see the market dip, and prefer more conservative investments that offer lower, steadier returns. Choose an investment strategy that works for your comfort level.
When it comes to your financial goals, consider how long you have until your target date. For example, if youâ€™re planning on retiring in 30 years, you can choose a more aggressive portfolio thatâ€™s more heavily invested in stocks.
If your goal is in the short-term, like you plan on buying a home within the next five years, you want to invest more conservatively. You may put your money in a high-yield savings account or invest in low-risk bonds.
The most important part is simply getting started.
â€śWhile it is important to plan, donâ€™t let the details overwhelm you to the point of inaction,â€ť advised Dr. Renfro. â€śItâ€™s better to get started now understanding just the basics than to keep putting it off.â€ť
If youâ€™re feeling overwhelmed, consider investing through a robo-advisor. With this approach, an online broker like Betterment or Wealthfront reviews your financial goals and risk tolerance and comes up with a comprehensive investment plan for you.
The robo-advisor will invest your portfolio in a range of ETFs, mutual funds, stocks, or bonds, and will rebalance your portfolio as you approach your investment target dates. Many robo-advisors have low fees, and have no account minimums, so you can invest even if you donâ€™t have a lot of money.
Check out the best robo-advisors of 2019 to get started.
According to Pine, consistency is key to your success as an investor.
â€śWith regard to investing, consistency is essential to avoid emotions driving decisions that ultimately lead to poor performance,â€ť she said. â€śIf you stick with a system, whatever that may be, you are more likely to weather various storms than if you trade around a lot and catch investments at the wrong time.â€ť
Making regular contributions will help you build long-term wealth. When youâ€™re short on cash each month, finding extra money to invest may feel impossible. However, there are different strategies you can use to invest, even if you donâ€™t have a lot of cash:
As a new investor, the most important thing to do is to get started as soon as possible. The earlier you invest, the more time your money has to grow.
After youâ€™ve opened an account and made your initial investment, spend some time learning about your investment options. Thereâ€™s always something new to learn, and growing your knowledge base can help you make more informed investment decisions, which can pay off over the long run. And keep reading on MagnifyMoney to learn more about investing!
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